Market Overview
The bulls run on equity markets took another shot in the arm yesterday as major markets all pushed strongly higher. Wall Street continues to push into new high ground, however it was the breakout on the DAX above 10,827 which was a multi month resistance that caught the eye. This comes with the euro remaining firm just before the ECB is expected to extend its QE program by at least six months at the meeting of the governing council today. However, the interest in the press conference will be whether the ECB is at the same time also beginning to prepare for the tapering of the QE program. This would be the surprise for the market and it is interesting to see the euro having started to push higher in the run up to the meeting. Last December the ECB disappointed the market by not extending easing, something that caused a huge rally on the euro. Could we be in line for a similar disappointment? It is also worth noting that the rally in Treasury yields is consolidating and possibly beginning to roll over. This is helping to pull the US dollar lower with the trade weighted dollar index looking corrective now. If the ECB disappoints, the dollar could go into reverse mode at least for the near term.
Wall Street was very strong into the close with the S&P 500 +1.3% at 2241, whilst the Asian markets were also positive (Nikkei +1.5%) helped by much better than expected China trade data in which both imports and exports beat expectations and were both positive for the month. European markets are holding on to yesterday’s gains in the early moves. In forex markets, the dollar is underperforming the major pairs and whilst the euro is higher in early moves, do not expect too much direction in front of the ECB. We can though expect elevated volatility this afternoon with the press conference. Gold and silver are also holding on to their gains with the weaker dollar, whilst oil has not yet managed to claw back any of yesterday’s losses.
Traders will be watching mostly for the ECB monetary policy which has the rates announcement at 1245GMT. The rates are all expected to be held flat with a 0.0% main refinancing rate, and the deposit rate at -0.4%. However the big volatility will be seen in the announcement of the QE program in the press conference at 1330GMT which is expected to be extended by between 6 to 19 months. There could also be interest in the size (currently €870bn per month and composition of purchases. The most volatility would come if the ECB also started to discuss tapering the purchases. US weekly jobless claims are at 1330GMT and is expected to rise to 272,000.
Chart of the Day – EUR/GPB
There have now been two sharply bull candles in the past three sessions and the corrective outlook is once more being turned on its head. The result is that momentum indicators are now accelerating higher with the Stochastics in a crossover buy signal and the MACD lines close. The RSI is also pulling higher. The market now needs to break through a reaction high within the sell off and this means resistance at £0.8577/£0.8595 is key today. A move above these levels would continue the move higher and reopen the old £0.8725/£0.8815 resistance. The hourly chart shows that the rally yesterday moved through the near term pivot at £0.8480 which has improved the outlook and this is now supportive today. Also hourly momentum indicators suggest that corrective moves are a chance to buy.
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